Should You Form an S-Corp for Your Real Estate Business?

For years I was running my Real Estate business as an LLC until a few years back when I was meeting with my Tax Advisor, Tony Mauro from Tax Doctor in Des Moines, and he recommended that I form an S-corp. It saved over $10,000 in taxes the very first year as compared to an LLC and now I pay myself a small salary from the S-corp. 

I’ve always read that the benefits of switching to an S Corp start at around $80,000 in income per year. If you make less than $80,000 per year in business profits and project that you’ll continue to do so, an LLC could make the most sense. But if you project you’ll make $80,000 per year or more, you should seriously consider an S Corp. Your tax advisor can look at your situation and give you a recommendation and the good news is you may still be able to get this done before the end of the year.   

Tony says, “In general, as your business grows, it becomes expensive from a tax standpoint to remain and operate as a Schedule C business.  This is because you pay income tax and also SS tax on all of your income. Once you reach a certain level, it may make sense to organize as an LLC or S-Corp, take a reasonable compensation, then distributions on the remainder of your income.  There are also other tax advantages you can use to reduce income as well.  As always though, make sure to check with your tax advisor and know all of the pros and cons of each so you can make a good decision for yourself.”

While we are talking about tax savings, let's talk about possible write offs. I found this link that has lots of useful information. https://turbotax.intuit.com/tax-tips/self-employment-taxes/tax-tips-for-real-estate-agents-and-brokers/L6JBCu3uH The ability to write off a large portion of  vehicle purchase with the PATH act was extremely  interesting to me! The article states that  “for example, in tax year 2022 you can expense, or write off, up to $27,000 of the price of a new car for the tax year in which you bought it. There are certain limits to the type of vehicle that qualifies for this tax break, however, as well as limits to the amount of the allowable deduction."  

If you do not have a trusted tax advisor you could be missing out.   I prefer to stay in my own lane and pay a tax pro so I can use my time to sell more homes! Doing your own taxes is like the novice trying to sell their home for sale by owner. You might be missing out on thousands in deductions to save a few hundred in fees.